Wednesday, July 4, 2012

It's a "May-June gloom" day at Calafia beach today, unfortunately. Water temp 65º, cloudy skies, but decent surf. That hasn't stopped thousands of people from flocking to beach however. Here's a shot from near the San Clemente pier, which shows how one enterprising group has claimed a choice bit of beach front in order to watch the fireworks tonight—and furnished it with astroturf, patio furniture, and a gas BBQ!

"But recall US consumer spending is at an all-time high. Furthermore, we’d be hard-pressed to find an economic recovery that was truly “consumer-driven” as described here. As we’ve argued before, employment recovery has always lagged economic recovery. Always. And that’s because overall and on average, the primary driver of economic growth is, in our view, the economy’s supply side. Growth generally comes from businesses investing funds in production, research and development and, ultimately, employment. As businesses are successful and earn profits, they’re able to expand, ultimately necessitating hiring more folks—leading, in turn, to employment recovery. But none of that can happen without first businesses producing goods folks are willing to consume.

"This may sound like not much more than a chicken-and-egg argument that can’t be reliably parsed. But consider the number of goods we have today beyond unimaginable to prior generations—things like cars, computers, refrigerators, microwaves, etc. It’s not as though a consumer woke up one day, headed for the local General Store and demanded the proprietor sell him a contraption to automatically chill his perishable food and freeze his longer-term provisions. (The proprietor would’ve looked at him like he had two unrefrigerated heads.) No—we as consumers didn’t (and couldn’t) realize we “needed” a refrigerator (steel plow, car, smart phone) until one was invented.

"News that is both fundamental and underreported is what typically moves stocks. And there are plenty of real, positive fundamentals that are largely unnoticed—what follows is a mere sample of the good news you likely won’t see splashed across headlines:

1) Corporations are very healthy—in the US and globally. Earnings and revenue growth continue apace, and corporate balance sheets are flush with cash (without much debt). There’s ample opportunity and incentive for firms to invest in new equipment, facilities, software, research and development, employees and the like—all of which can boost growth looking forward.2) The global economy, on balance, is growing and stronger than most assume. US, developed world and Emerging Markets GDP are at all-time highs. The eurozone remains weak, but history has shown the world overall can grow in the face of regional weakness.3) The US Leading Economic Indicator Index is high and rising. Though LEI’s not a perfect indicator, strength in components like new orders, capital goods orders and building permits is inconsistent with a soon-to-be-weak economy.4) Housing’s improved lately, and new and pending home sales trounced expectations in May to reach two-year highs. Homebuilders have worked through much of their excess supply, so even a modest pickup in sales from here could boost prices.5) Global trade is getting ever freer. The EU inked free-trade pacts with Peru and Colombia and progressed on a deal with India. China and Chile signed a strategic trade partnership and are eyeing a full free-trade agreement. Taiwan’s set to restart long-stalled free-trade talks with the US. And Trans-Pacific Partnership talks kicked off Tuesday—a long process, no doubt, but one that could remove protectionist barriers between North America and emerging Asia.6) By most measures, stocks remain very cheap while sentiment remains dour. Even a mild improvement in sentiment—like, perhaps, increased confidence the eurozone’s not falling apart—could provide a nice tailwind.

As always, negatives exist, but today’s negatives have been widely known for some time and thus likely aren’t powerful enough to counter underappreciated positives (though volatility could very well continue). So here’s to freedom, free markets and more bull market ahead.